NEW YORK (BankingMyWay) -- The U.S. government is launching an investigation, run by the Federal Deposit Insurance Corporation, of payday loans. High-interest payday loans are a burr under the saddle of consumer advocates who are finally getting their wish granted that payday lenders become a federal target.
Critics of payday loans argue the financial product is to the family budget what cancer is to the human body -- toxic, debilitating, and in some cases, ultimately fatal.
According to the consumer advocacy website PayDayLoanInfo.org, most payday loans average between $100 and $1,000 and come with a crippling 400% interest rate, and operational fees of between $15 and $30 for a $100 loan.
Payday loans can make the most onerous credit card terms look good.
According to PayDayLoanInfo.org, a $300 cash advance on a typical credit card, repaid within 30 days, would rack up a $13.99 finance charge and an annual interest rate of 57%. In comparison, a payday loan of $300 would trigger a $17.50 fee per $100, and a 426% annual interest rate.
Apparently, the U.S government isn't blind when it comes to payday loan market and has had just about enough.
Prompted by consumer advocacy groups like PayDayLoanInfo.org and Americans for Financial Reform (250 groups in total had petitioned the government to do something), FDIC director Martin Gruenberg responded in a recent letter to the AFR that the organization would look into payday loans -- even payday loans initiated by banks.
"The FDIC is deeply concerned about these continued reports of banks engaging in payday lending and the expansion of payday lending activities under third-party arrangements," wrote Gruenberg in the letter. “Consequently, I have asked the FDIC’s Division of Depositor and Consumer Protection to make it a priority to investigate reports of banks engaging in payday lending and recommend further steps by the FDIC,” Gruenberg added.
There is no shortage of major banks that actually engage in payday lending, including Wells Fargo (Stock Quote: WFC), Regions Financial (Stock Quote: RF) and US Bancorp (Stock Quote: USB). Wells Fargo charges $7.50 for every $100 borrowed, while Regions Banks charges $1 for every $10 in short-term, emergency loans.
Consumers, legislators and regulators can’t say they didn’t see this coming. In the aftermath of the Dodd-Frank Financial Reform Act and the Credit Card Act of 2009, banks have seen traditional fee programs curbed and are looking for new profit centers to make up for those lost fees.
According to Barclay’s, the 20 biggest U.S. banks will lose $12.5 billion in 2012 from lost fees. That explains the move toward payday loans, and also explains the spotlight on payday loans from federal regulators.
Consumers may see payday loans as a necessary evil, but once the government gets its tentacles around such loans a transformed landscape becomes a distinct possibility. The transformation may have begun this week courtesy of the FDIC's lead on the issue. As a result, consumers should expect increased oversight and potentially big changes.